Wells Fargo's Farmer Upgrades Chipotle, Says History Shows Quick Comeback Is Possible

• Chipotle Mexican Grill, Inc CMG shares have been trending south in the last three months, and have lost 25 percent since November 2.
• Wells Fargo Securities’ Jeff Farmer upgraded the rating for the company from Market Perform to Outperform.
• A study of previous food safety cases show that share price recovery closely tracks the company’s ability to recapture lost SSS, Farmer pointed out.

Analyst Jeff Farmer mentioned that an analysis of food safety case studies indicates that share price recoveries closely track the recapturing of the lost Same-Store-Sales [SSS]. The analysis has also showed that “the majority of restaurant concepts that have experienced a food safety issue see the return of sustained SSS growth within 12-15 months of the incident.”

Chipotle Mexican reported a better-than-guided 4Q EPS of $2.17 due to lower-than-expected non-cash based compensation. The EPS estimate for 2016 has been reduced from $12.00 to $10.04 to reflect higher G&A and marketing spend in 1H16.

Although the company is likely to incur increased costs to win back lost customers, its share price is likely to closely track “demonstrated SSS recovery, even in the backdrop of reduced near-term profitability,” Farmer wrote.

“We believe CMG shares will see both share price and valuation multiple expansion over 2016 as the concept's SSS make sequential quarterly progress back to SSS growth,” the Wells Fargo Securities report noted. Farmer expects 2Q16 to represent Chipotle Mexican’s first quarter of a “multi-quarter run” of improving sequential SSS.